My prior post described a setup that I will watch for in the event of an immediate retest of the 1018 and 1013 levels. But what if that does not occur? What if we gap up in the morning? Now that is a different case, and it can be tricky because I already see two gaps in the price action on Friday. So I now suggest another possible setup to consider tomorrow in the event of a gap-up scenario.
The setup assumes that we saw the completion of the third and fourth wave of an EWT on Friday. Open the following chart for consideration:
Elliot Wave Theory suggests that rallies happen in 5 waves - three with the trend and two counter trend. In this case, our first wave is made up of the first three bars on the hourly chart. This is where we broke trend. Note the small breakaway gap that formed between the second and third candlestick. The second wave included 4 bars of rest, allowing momentum to rebuild for the third wave which was explosive and included a classic "continuation gap" through the prior high in the 2B pattern. The continuation gap is labeled. We then had a fourth wave of pause that DID NOT retrace the continuation gap, followed by what seems to be the beginning of the 5th and final wave of this rally.
If this is a classic EWT and the gaps are "breakaway" and "continuation" in the chart, we can expect a final "exhaustion" gap tomorrow morning which could drive price action all the way to 1040. A target 1040 because the continuation gap is typically located 50% up the rally leg. This rally started at 996 (arguably 992) and the gap is around 1018. That puts the bottom half of the rally at 22 points, leaving 22 to the top from there. 1018 + 22 = 1040.
These are tough to play because you really need to be in long before the exhaustion gap prints. However, the good news is that most exhaustion gaps will retrace - allowing a setup on the short side.
If we get the gap up in the morning I will be looking to enter a short position at the top with a loose stop, tightening as the retrace is completed. A tactic is to drag a fib from the start of the rally to the suspected top after the gap and look for at least a 38% retracement.
There you have it - the two setups that I will look for in the morning.
Happy trading!
7 comments:
Looks no gap's are convincingly filled today, looking at euromarket. Still very tough to call a strong direction.
Sideways? We'll see.
Morning Paulus,
Looks like the Gap-up is the topic of the day! We can only wait and see. I'll be watching volume today and try to make heads or tails of the action. If we do not retrace, I'll look for continuation in a higher timeframe. If we see a break down through the top of the hole, I'll look for a short entry and play the retrace.
Why can't this be easier? I mean a system with only three choices; up, down, or sideways - yet it manages to fool the majority of participants the majority of the time!
Good luck!
Dave, just a question I am also fighting with. Do you agree that the huge amount of money not in the market yet, for example 4-5 % deposits that will fall free coming months, or funds that missed the big up, is a potential killer for fundamental trading? This cash can not roll over in 2% area, or low yielding goverment paper.
It is squeezed into the asset/comm market creating another bubble.
Hi Paulus,
I think fundamental trading has been dead this whole rally. We are bubbling.
There is money on the sidelines and I think it does come in to market in waves. It has to, so long as specualtion/manipulation continues to press new highs in the rally. The question is when will the speculation run out? As soon as it does, layers of support from the big money quickly get pulled and we have the house of cards scenario that has played out in almost every historic bear market rally.
I do believe that the funds recognize this phenom - and will continue to participate with caution. I do not see a sudden all-in scenario developing in this rally. After-all, that would be capitulation.
I think it is improper to project or call a top or a bottom too far in advance. Rather, I like to watch for topping formations, rally signs, breakdown signals, etc. and try to play the smartest setup possible.
This last topping formation seems to have broke down with the breakout on Friday. As a result, I had to cut 50% of my short position and swing long to protect. I'll continue to play setups into the current trend and carefully play minor wave couter trends if setups present.
I do have some posts from the last couple of sessions that speculate on the next major resistance levels. Everything based on technicals - I can't rely on fundamentals!
Thanks for posting.
Dave,
You really got it spot on today.
Man what a monday!
Thanks, really appreciated.
Next stop my oil shorts, I have added, but thats my hang up.
CU tomorrow
Thanks Paulus,
I'm happy with the analysis - less so with the trade execution today. The gunning activity took out four of my trades and nullified my profit. Lesson learned...
Thanks for your post. Let's watch the gap at 1018 tomorrow.
Sorry to hear. Maybe to tight a stop. I'm looking better, though keeping positions overnight to fight another day. Bit risky, but I feel 1018 is in the books, europe will follow US down and oil lagging behind will make a good trading week.
Untill reversing and killing all profits off course.
Enjoy your evening David, as tomorrow you have to fight GSoliath again.
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